Buyer beware: Hong Kong’s $4.8bn stock wipeout shows risk

Ten mid- and small-cap shares plummeted as much as 81% for no apparent reason Thursday, wiping out $4.8 billion of investors’ money. The firms hadn’t published news that would move markets and said they knew no reason for the drop, fuelling speculation that ranged from debt repayments to missing executives. The next day, as several of these stocks rebounded, another inexplicably tumbled.

The swings should concern investors sitting in London or New York because some of these shares are included in global benchmarks. Local observers speak about “ dark corners” of Hong Kong’s market where a web of cross-holdings and low liquidity fuel corruption and keep valuations at one of the lowest levels in the world.

Hong Kong’s small and mid-cap space is a corporate governance “minefield,” said Manuel Schlabbers, chief executive officer of small-cap focused investment firm Accudo Capital. “For something to blow up 80%, it is unlikely to be driven by fundamentals.”

Much of the losses on Thursday came from Chinese developer Jiayuan International Group Ltd., which plunged 81%. After some traders pointed to Jiayuan’s $350 million of maturing debt, the company said it has fully repaid the notes, its financial condition is healthy and operations are normal. It rose 75% on Friday.

However another small-cap, Chong Sing Holdings FinTech Group, fell 33% on Friday. As recently as November, the company was part of the MSCI China index. Calls to Chong Sing’s office went unanswered.

The swings bring back memories of Hong Kong’s small-cap tumble in November and the so-called Enigma Network crash in 2017. While the wild moves haven’t roiled confidence in the broader market — the Hang Seng index on Friday completed its first three-week gain in almost a year — the gauge is valued at less than 10 times its companies’ reported earnings as price volatility and the US-China trade war restrict potential.

A representative for the Securities and Futures Commission declined to comment. Hong Kong Exchanges & Clearing conducts robust monitoring of the market to support orderly trading, makes inquiries as needed and will continue to do so, a representative said by email.

“Hong Kong gives the impression of a developed market because of huge listings like Xiaomi but there is an underbelly of small companies with cross-holdings and opaque transactions that is shocking in scale,” said Fraser Howie, who has two decades of experience in China’s financial markets and co-authored the 2010 book ‘Red Capitalism.’ “There is such uncertainty about what is going on and no one in authority seems to care.”

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